Name (Last, First) ________________________________    Orazem/Econ 101:1/Midterm 1A/Spring2009

Please list your last name and then your first name on both the exam and the bubble sheet. 
Use a pencil in filling out the bubble sheet. Please insert the bubble sheet in the exam and
hand both in together in the manila folder with the first letter of your last name.   

Choose the option that best completes each statement.    Each question is worth 2.3 points.

1. The law of demand states that, other things equal:

A) as the price increases, the quantity demanded will increase.
B) as the price decreases, the demand curve will shift to the right.
C) as the price increases, the demand will decrease.
D) as the price increases, the quantity demanded will decrease.

2. In China, the resources used in the production of rice include

A) soil, seed, water, and sunlight
B) planters, harvesters, processors and marketers
C) land, labor and capital
D) None of the above, only rice is needed to produce rice

3. Zoe's grandparents are excited about finally paying off their mortgage, because,
as they say, “Our cost of housing is now zero.” Zoe should explain to them the
economic principle of:
A) marginal analysis: if the additional cost of housing is zero, then their additional
benefit is also zero.
B) opportunity cost: by living in the house, they are giving up the opportunity to sell
the house, buy a smaller one, and pocket the difference.
C) efficiency: if their cost of housing is now zero, they should let Zoe move in without
charging her any rent. Zoe is better off, and her grandparents aren't hurt.
D) equity: it is unfair that some people are still paying off their mortgage.

4. Specialization and trade should lead to all of the following except:

A) individuals learning specific skills and earning a salary.
B) a decrease in total economic output.
C) higher living standards.
D) the exchange of goods and services in markets.

5. Which of the following is NOT a reason that markets usually lead to efficiency?
A) People are naturally efficient.

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B) Individuals have incentives to offer what people want.
C) Trade encourages efficiency.
D) Inefficient firms will lose business.

6. The tradeoff between equity and efficiency occurs because:

A) efficient allocation of resources may mean some people produce or receive more
than others.
B) allocating resources equally may cause inefficiency.
C) to ensure equal distribution of resources, someone will be made worse off.
D) of all of the above.

7. A friend comes up to you and offers to give you a free ticket to the local
professional team's baseball game that night. You decide to attend the game.    It
takes five hours to go to the game and costs you $15 for transportation. If you
had not attended the game, you would have worked at your part-time job for $8
an hour. What is the opportunity cost of your attendance at the game?
A) zero—The ticket is free.
B) $65
C) $40
D) $55

8. When building a model, economists:

A) simplify reality in order to highlight what really matters.
B) attempt to duplicate reality in all its complexity.
C) ignore the facts, and instead try to determine what the facts should be.
D) do all of the above

9. Suppose the state of Oklahoma decides to produce only two goods—oil and
football helmets. According to the production possibilities frontier, as oil
production increases, the production of football helmets will:
A) increase.
B) not change.
C) decrease at a decreasing rate.
D) decrease.

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Use the following to answer questions 10-12:

Figure: Production Possibilities Curve for Tealand

10. (Figure: Production Possibilities Curve for Tealand) In the accompanying figure,
if Tealand is producing 10 million scones and 10 million cups of tea (point A),
then we know that the economy:
A) is using its resources efficiently.
B) is using its resources inefficiently.
C) is fully-employing its resources.
D) is doing none of the above.

11. (Figure: Production Possibilities Curve for Tealand) In the accompanying figure,
Tealand is currently producing at point C on its production possibilities frontier.
What is the opportunity cost in Tealand of increasing the production of tea from
20 million cups to 30 million cups?
A) 10 million cups of tea
B) 5 million scones
C) 10 million scones
D) The answer is impossible to determine from the information given.

12. (Figure: Production Possibilities Curve for Tealand) In the accompanying figure,
Tealand can only produce at point E if the government:

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A) eliminates unemployment.
B) raises taxes.
C) stimulates the economy by increasing government purchases of tea and scones.
D) None of the above.    Point E is not attainable.

13. The production possibilities frontier is bowed-out from the origin, because:
A) resources are not equally suited for the production of both goods.
B) resources are scarce.
C) economic growth leads to inefficiency.
D) resources are inefficiently used.

14. In a single day, Sarah can produce 10 hamburgers while Abe can produce 5
hamburgers. We then know that:
A) Sarah has the comparative advantage in making hamburgers.
B) Sarah has the absolute advantage in making hamburgers.
C) Abe has a comparative advantage in making hamburgers.
D) Abe has an absolute advantage in making hamburgers.

15. Trade in which people directly exchange goods that they have for goods they
want is called
A) globalization
B) tariff exchange
C) barter
D) a zero-sum transaction

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Use the following to answer questions 16-18:

Coffee and Salmon Production Possibilities in units of 1 million tons

Coffee Salmon
Brazil 40 20
Alaska 10 10

16. (Table: Coffee and Salmon Production Possibilities) This table shows the
maximum amounts of coffee and salmon that Brazil and Alaska can produce if
they just produce one good.    Brazil has an absolute advantage in producing:
A) coffee only.
B) salmon only.
C) both coffee and salmon.
D) neither coffee nor salmon.

17. (Table: Coffee and Salmon Production Possibilities) This table shows the
maximum amounts of coffee and salmon that Brazil and Alaska can produce if
they just produce one good.    The opportunity cost of producing a unit of salmon
in Alaska is
A) one unit of coffee.
B) one unit of salmon.
C) four units of coffee.
D) two units of coffee.

18. (Table: Coffee and Salmon Production Possibilities) This table shows the
maximum amounts of coffee and salmon that Brazil and Alaska can produce if
they just produce one good.    Brazil has a comparative advantage in producing:
A) coffee only.
B) salmon only.
C) both coffee and salmon.
D) none of the above.

19. Which of the following is a normative statement?

A) International trade leads to expanded consumption opportunities.

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 B) Higher expenditures on health care will reduce infant mortality rates.
C) We should reduce our dependence on oil imports.
D) Increased defense spending will lead to higher budget deficits.

20. Which of the following would be a positive economic statement?

A) Government has grown too large and should be reduced.
B) There has been an increase in the rate of inflation.
C) Government should be subject to the same rules as all other institutions.
D) Women should be paid as much as men for the same work.

Use the following to answer questions 21-22:

Figure: Slope

21. (Figure: Slope) In the graph, the slope of the line between points A and B is:
A) +8.
B) –8.
C) –2
D) +2.

22. (Figure: Slope) This graph indicates that as X increases, the value of Y
A) increases
B) decreases
C) remains constant
D) is undefined

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 23. Goods and services purchased from abroad are ______, while goods and services
sold abroad are ______.
A) exports; imports
B) imports; exports
C) exports; quotas
D) quotas; factors

Use the following to answer questions 24-26:

Figure: Production Possibilities for Jackson and Tahoe

24. (Figure: Production Possibilities for Jackson and Tahoe) The accompanying
figure shows the production possibilities frontiers for two countries, Jackson and
Tahoe.    Suppose that Jackson has a lower opportunity cost of producing wheat
than Tahoe. Then we know that
A) there will be gains from trade in which Jackson specializes in wheat which it trades
for cattle produced in Tahoe.
B) there will be gains from trade in which Jackson specializes in cattle which it trades
with wheat produced in Tahoe.
C) there are no gains from trade because opportunity costs are not the same across the
two countries.

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D) Jackson cannot benefit from trade with Tahoe.

25. (Figure: Production Possibilities for Jackson and Tahoe) The accompanying
figure shows the production possibilities frontiers for two countries, Jackson and
Tahoe.    The information shows that
A) Jackson has the higher opportunity cost of cattle production.
B) Tahoe has the higher opportunity cost of cattle production.
C) Jackson has a comparative advantage in cattle production.
D) both b and c

26. (Figure: Production Possibilities for Jackson and Tahoe) The accompanying
figure shows the production possibilities frontiers for two countries, Jackson and
Tahoe.    In the e absence of trade, Jackson produces and consumes 30 units of
cattle and 80 units of wheat, while Tahoe produces and consumes 80 units of
cattle and 60 units of wheat.    With complete specialization according to
comparative advantage, the two nations' production of wheat will:
A) remain constant.
B) increase by 120 units.
C) increase by 60 units.
D) decrease by 60 units.

27. Bangladesh exports shirts, which are labor-intensive, to the United States. The
likely source of Bangladesh's comparative advantage in shirts is:
A) a hotter climate, which makes it possible to produce shirts outdoors, eliminating the
need for factory buildings and hence reducing costs.
B) superior production technology.
C) in comparison with the United States, Bangladesh is a labor-abundant country.
D) the higher labor productivity in Bangladesh.

28. The World Trade Organization:

A) is the largest multinational corporation in the world.
B) works together with UN forces to enforce international decisions.
C) organizes international negotiations over trade terms and resolves trade disputes
among members.
D) imposes tariffs and quotas to benefit developing countries.

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 29. An example of a tariff is a:
A) limit on the total number of Honda automobiles imported from Japan.
B) regulation specifying that each imported Honda automobile must meet certain
emission exhaust guidelines.
C) tax of $500 on each Honda automobile produced in the United States.
D) tax of 10 percent of the value of each Honda automobile imported from Japan.

30. Many countries engage in trade protection by imposing import tariffs or quotas
for at least some goods. This is because:
A) trade restrictions make the country better off as a whole.
B) trade restrictions benefit workers while insuring consumers have better choices and
prices.
C) even though trade restrictions harm consumers, they benefit producers who may be
a more cohesive and politically influential group.
D) trade restrictions improve the country's productive efficiency.

31. NAFTA:
A) is responsible for large employment losses in the United States.
B) has harmed consumers by raising prices.
C) is a trade agreement including the United States, Canada and Mexico.
D) all of the above.

32. The Kansas market for corn is considered a competitive market. This means there
are ________ buyers and ____________ sellers of corn in Kansas.
A) many; few
B) few; many
C) many; many
D) few; few

33. A product is called an inferior good if:

A) when income increases, demand for it remains unchanged.
B) when income increases, demand for it decreases.
C) when income increases, demand for it increases.
D) it fails to meet standards set by the U.S. Food and Drug Administration.

34. If goods A and Z are complements, an increase in the price of good Z will:

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A) increase demand for good A.
B) decrease demand for good A.
C) not affect the demand for good A.
D) increase consumption of both goods A and Z because they are consumed together.

35. The Wall Street Journal recently reported that the price of new cars has
decreased, and the quantity of new cars sold has dropped. This combined
decrease in market price and quantity was most probably caused by:
A) a decrease in buyers' incomes.
B) a decrease in the price of gasoline.
C) an increase in production costs.
D) a decrease in production costs.

36. Which of the following will NOT cause a shift outward in the supply of good X?
A) an improvement in the technology used to produce good X
B) an increase in the price of good X
C) a decrease in the price of inputs used to produce good X
D) none of the above

37. When the economy suffers a downturn, vacationers are more likely to take car
trips than to fly. Which of the following provides the most reasonable explanation
for this phenomenon?
A) Air travel and vacation travel by car are complementary goods.
B) Air travel and vacation travel by car are both normal goods.
C) Air travel is a normal good and vacation travel by car is an inferior good.
D) Air travel is an inferior good and vacation travel by car is a normal good.

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Use the following to answer questions 38-41:

Figure: Market for DVDs

38. (Figure: Market for DVDs) This figure shows the weekend rental market for
DVDs in Collegetown. The equilibrium price for DVD rentals is ______ and the
equilibrium quantity is _________.
A) $5; 50
B) $3; 30
C) $9; 90
D) $6; 40.

39. (Figure: Market for DVDs) In this figure, suppose the local government decides
to fix the rental price of DVDs at $7 per rental without shifts in either demand or
supply, then:
A) DVD rentals would be 30 rentals per weekend.
B) DVD rentals would be 70 rentals per weekend.
C) the resulting increased supply will cause an increase in demand.
D) DVD rentals would be 50 rentals per weekend.

40. (Figure: Market for DVDs) In this figure, at a rental price of $3, there will be
A) equilibrium in the rental market for DVDs.
B) an increase in demand.
C) an excess supply of 40 DVD rentals.

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 D) an excess demand of 40 DVD rentals.

41. (Figure: Market for DVDs) In this figure, which of the following might cause a
change in the equilibrium to a price of $7 and a quantity of 30?:
A) an increase in Collegetown student incomes.
B) a decrease in the price of movie theatre tickets, a substitute for DVD rentals.
C) an increase in the minimum wage which raises the cost of labor for Collegetown
employers.
D) a switch to Internet movie downloads that lowers the firm's cost of acquiring new
DVDs to rent.

Use the following Figure to answer question 42.

Figure: The Average Retail Price of Gasoline

42.    A recent letter to the Ames Tribune complained about the sharp rise in the price of gasoline,
referring to data similar to that above.    The graph may be misleading because of all of the
following reasons except
A.    the elimination of the origin
B.    the choice of an atypical starting date
C.    the use of a short time frame
D.    the use of daily instead of weekly average prices

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43.    Why do economists use models?
A. to distinguish between positive and normative statements
B. to solve disagreements about the desirable extent of income equality
C. to choose the correct political opinion among many competing ones
D. to make forecasts

44.      The purpose of an economic system is to:

A. eliminate scarcity.
B. protect the environment.
C. allocate scarce resources.
D. create an equal distribution of wealth.

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Answer Key

1. D
2. C
3. B
4. B
5. A
6. D
7. D
8. A
9. D
10. B
11. B
12. D
13. A
14. B
15. C
16. C
17. A
18. A
19. C
20. B
21. C
22. B
23. B
24. A
25. A
26. C
27. C
28. C
29. D
30. C
31. C
32. C
33. B
34. B
35. A
36. B
37. C
38. A
39. A

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40. D
41. C
42. D
43. D
44. C

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